An Act amending the act of March 4, 1971 (P.L.6, No.2), known as the Tax Reform Code of 1971, in personal income tax, further providing for classes of income.

PRINTER'S NO. 737
THE GENERAL ASSEMBLY OF PENNSYLVANIA
SENATE BILL
No. 722
Session of
2025
INTRODUCED BY J. WARD, ROTHMAN, BARTOLOTTA, BROOKS, LAUGHLIN,
COLEMAN, PHILLIPS-HILL, PENNYCUICK, HUTCHINSON, BROWN,
MILLER, BAKER, DUSH, STEFANO AND ROBINSON, MAY 5, 2025
REFERRED TO FINANCE, MAY 5, 2025
AN ACT
Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An
act relating to tax reform and State taxation by codifying
and enumerating certain subjects of taxation and imposing
taxes thereon; providing procedures for the payment,
collection, administration and enforcement thereof; providing
for tax credits in certain cases; conferring powers and
imposing duties upon the Department of Revenue, certain
employers, fiduciaries, individuals, persons, corporations
and other entities; prescribing crimes, offenses and
penalties," in personal income tax, further providing for
classes of income.
The General Assembly of the Commonwealth of Pennsylvania
hereby enacts as follows:
Section 1. Section 303(a)(2) of the act of March 4, 1971
(P.L.6, No.2), known as the Tax Reform Code of 1971, is amended
to read:
Section 303. Classes of Income.--(a) The classes of income
referred to above are as follows:
* * *
(2) Net profits. The net income from the operation of a
business, profession, or other activity, after provision for all
costs and expenses incurred in the conduct thereof, determined
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either on a cash or accrual basis in accordance with accepted
accounting principles and practices but without deduction of
taxes based on income. For purposes of calculating net income
under this paragraph, to the extent a taxpayer properly deducts
an amount under [section 195(b)(1)(A) of the Internal Revenue
Code of 1986 (26 U.S.C. § 195(b)(1)(A))] 26 U.S.C. § 195(b)(1)
(A) (relating to start-up expenditures), as amended, and the
regulations promulgated [under section 195(b)(1)(A) of the
Internal Revenue Code of 1986] thereunder, the taxpayer shall be
permitted a deduction in equal amount in the same taxable year.
The following apply:
(i) Net profits from this class of income, if any, shall be
determined after adding the net profits from all businesses,
including small businesses. For purposes of calculating net
profits under this subparagraph:
(A) Net loss from non-small businesses shall be netted
against net profits from other non-small businesses.
(B) Net loss from small businesses shall be netted against
net profits from other small businesses after netting against
any net profits determined in clause (A).
(ii) The excess of the amount of net loss for a taxable year
for small businesses determined in subparagraph (i)(B) after
netting against any net profits determined in subparagraph (i)
(A) shall carry over for twenty taxable years. In a subsequent
taxable year, the net loss carryover shall be applied against
any profits resulting from netting the net profits and net
losses of non-small and small businesses in subparagraph (i)(A)
and (B).
(iii) Unused net loss carryovers shall expire after twenty
years.
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(iv) In determining whether there is a net loss carryover,
and in applying the net loss carry-over provisions, the net
profits and net losses of spouses who file a joint return shall
not be combined.
(v) Unless treated differently for Federal income tax
purposes, if an interest in a business is jointly owned, each
taxpayer is deemed to own an equal share in the profits, losses,
gains and capital for purposes of applying this paragraph.
(vi) Upon the death, liquidation, dissolution, winding up or
other termination of a taxpayer, a net loss carryover shall
expire and shall not transfer to another taxpayer.
(vii) For purposes of this paragraph, the term "small
business" means an interest in an operating trade or business
entity, the principal purpose of which is not the management of
investments or income-producing assets owned by an entity which
has employed an average of less than fifty full-time equivalent
employes, and a net book value of assets totaling less than five
million dollars ($5,000,000) as of December 31 of the taxable
year in which the net operating loss arose, and which is
directly or indirectly owned by fewer than ten proprietors,
partners or shareholders. The rules in 26 U.S.C. § 318 (relating
to constructive ownership of stock) shall be used to determine
whether the small business is owned by fewer than ten persons.
In applying 26 U.S.C. § 318, a reference to "stock" shall mean
any interest in a small or non-small business, except for 26
U.S.C. § 318(a)(2)(C) and (3)(C).
* * *
Section 2. The amendment of section 303(a)(2) of the act
shall apply to tax years beginning after December 31, 2024.
Section 3. This act shall take effect immediately.
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